A concern that Congress could derail real estate recovery

If Congress doesn't get in the way, Des Moines businessman Dave Brown foresees a steady recovery in the real estate market.

That improvement could be waylaid by tax reform efforts in Washington, D.C., in particular a suggestion that a popular safe haven for real estate transactions be eliminated from the tax code.

Brown is president and co-owner of IPE 1031. It is named after Section 1031 of the Internal Revenue Code, which allows sellers of real estate to avoid capital gains taxes for a period of time providing they satisfy a variety of conditions.

Among the requirements is that proceeds from a sale, including potential capital gains taxes, fall within a safe harbor, the most common being a qualified intermediary. IPE 1031 is such an intermediary.

The company can hold sale proceeds on properties used for investment or for productive use in a trade or business for up to the 180 days before those funds need to be invested in like-kind properties, which can include rental properties, farms and ranches, offices, motels and hotels, golf courses, raw land, retail properties, industrial properties and properties leased for 30 years or more, according to the IPE 1031 website.

Brown also is president of the Federation of Exchange Accommodators, a trade association that has its attention fixed on hearings before the House Ways and Means Committee, which has 11 working groups that are weighing a variety of tax changes.

Elimination of Section 1031, which was first established in 1921, would prompt property owners to take their real estate off the market for fear of the tax consequences, Brown said.

He is quick to point out that 1031 exchanges are not a tax dodge. Instead, they provide a way for investments to generate additional value. Capital gains taxes kick in with the final sale of an exchanged property.

Brown said elimination of 1031 exchanges would have a harsh impact on real estate companies, possibly taking away a third of their business.

By taking property off the market, the reduced supply would lead to a spike in prices, he said.